Consignment Cash Proceeds Tracing under Uniform Commercial Code
Perfecting consignment cash proceeds requires UCC-1 filings, prior inventory lender notices, and deposit account control agreements to defeat bank set-offs.
Section 9-340
Meaning
A specific provision of the Uniform Commercial Code governs the right of a bank to exercise a common-law right of set-off against a secured party who holds a security interest in a deposit account. This section 9-340 establishes the priority rules between the bank’s set-off right and the secured party’s claim. In most cases, the bank’s right of set-off takes precedence over a security interest held by another creditor.
Bank Priority
The depository institution can apply the funds in the debtor’s account to pay down the debtor’s obligations to the bank. Under section 9-340, this priority holds true even if the security interest of the outside creditor is perfected.
Account Control
To override the bank’s priority, the secured creditor must obtain control of the deposit account by becoming the bank’s customer on that account. Once the secured party is the account holder, the bank’s right of set-off under section 9-340 is subordinated to the secured party’s claim, protecting the creditor’s access to the funds.
Debt Offset
Depository institutions rely on this rule to offset outstanding loan balances with deposit balances. This protection reduces the credit risk for banks that provide both deposit accounts and commercial lending to the same enterprise.